Mathematics and Economics

Archive for the ‘Uncategorized’ Category

Ross Recovery

In Economics, Finance, Mathematics, Uncategorized on January 12, 2016 at 6:09 am

In this post, we discuss the interesting recent paper by Steve Ross,”The Recovery Theorem”, in which a method is proposed to disentangle the risk aversion component from the subjective probability measure from state prices. In particular, a method is proposed to back out the market’s forecast of returns (a distribution over returns) from option prices. Attached is the pdf summary detailing the results.